The NFLX bears are at it again as Netflix, Inc. (NFLX) prepares to release its third-quarter earnings report. Netflix earnings are slated to hit the Street after the close of trading tomorrow, and, despite strong year-over-year revenue growth projections, NFLX stock’s sentiment backdrop is awash in negativity.
While this setup would make some investors nervous, contrarian options traders could come away smiling this week.
By the numbers, Netflix earnings are seen slipping to eight cents per share in the third-quarter, down from 14 cents per share in the same quarter last year. Revenue, on the other hand, is expected to jump 24.2% to $1.75 billion.
Historically, Netflix has beaten or matched the Street’s targets in every quarter since October 2009. As such, it should come as no surprise that EarningsWhisper.com reports third-quarter whisper number of 10 cents per share for Netflix, 2 cents higher than the consensus.
Taking a closer look at the brokerage community, we find a fair amount of skepticism levied against Netflix. For instance, NFLX stock has attracted 25 “buy” ratings, compared to 14 “holds” and four “sells,” according to data from Thomson/First Call. Additionally, the 12-month consensus price target for NFLX stock rests at $125 per share, a premium of just 10.2% to yesterday’s close.
This relatively neutral backdrop leaves plenty of room for potential price-target increases or ratings upgrades following tomorrow’s report.
Outside of a handful of analysts, though, NFLX bulls are few and far between. Specifically, short sellers continue to maintain a tight grip on their bearish NFLX bets. As of the most recent reporting period, 41.4 million NFLX shares were sold short, accounting for 9.9% of the stock’s total float. These open short positions could provide more than ample fuel for potential covering rally in the wake of a strong earnings report.
What’s more, if short sellers are nervous, it isn’t showing up in NFLX’s options pits.
Netflix’s October/November put/call open interest ratio currently rests at 1.15, with puts easily outnumbering calls among near-term options. This ratio dips only slightly to 1.13 for the soon-to-expire October series. Typically, if short sellers were hedging their bets, you would expect to see more call open interest. So this lack of call OI suggests a lack of concern among short sellers, potentially opening up more exposure to a short squeeze situation.
Click to Enlarge Overall, October options are pricing in a potential post-earnings move of about 13.5% for NFLX stock. This places the upper bound at $128.30, while the lower bound lies at $97.70.
With little in the way of technical resistance until the $130 region, a breakout could mean fresh all-time highs for NFLX, while a selloff should hit a bump at $100 and a stop near $95, should things go south.
2 Trades for NFLX Stock
Call Spread: NFLX stock has momentum on its side heading into tomorrow’s report, but the shares could see a bit of profit taking following Monday’s rally. Still, a strong quarterly report could result in another quick pop for NFLX stock as sideline money is brought to bear. Traders looking to get in on the action might want to consider an Oct $115/$125 bull call spread.
At last check, this spread was offered at $3.76, or $376 per pair of contracts. Breakeven lies at $118.76, while a maximum profit of $6.24, or $624 per contract, is possible if NFLX closes at or above $125 when October options expire.
Put Sell: Alternately, if an outright bullish play isn’t your cup of tea, you might want to consider a put sell strategy on NFLX. At last check, the Oct $95 put was bid at $1.34, or $134 per contract. As long as NFLX trades above $95 through October expiration this Friday, traders who open this position will keep the initial premium received. However, if NFLX trades below $95 before Friday’s close, you may be assigned 100 shares of NFLX stock for each contract sold at a cost of $95 each.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
